Looking beyond CRE for private debt exposure
Private wealth manager LGT Crestone has shared how the firm is utilising private debt strategies via a satellite approach and encouraged advisers to look beyond domestic commercial real estate (CRE).
The firm said it believes private debt offers investors potential for enhanced returns, lower volatility and diversification relative to public markets.
While advisers may consider domestic CRE as the focal point of private debt, the firm said it is worth exploring other parts of the universe. As well as this, there are opportunities in corporate lending, asset-based lending, distressed debt, special situations and private commercial real estate debt.
It has specifically built out allocations in global corporate lending and multisector asset-based finance, it said, where the sectors bring diversification relative to local strategies.
“In building out our private debt allocations, the primary focus areas have been across the two largest sectors, namely corporate lending and asset-based finance. We invest in CRE, in addition to distressed debt and special situations, globally.
“However, these exposures are typically a component of broader offerings versus dedicated strategies. We consider these subsectors to be more ‘satellite’ in nature and as such would allocate a smaller allocation within our clients’ portfolios.”
For asset-based lending, the firm said this is attractive as it can deliver excess returns above public markets, targets absolute double-digit returns, offers exposure to diversified pools of underlying assets and lower correlations to traditional corporate credit.
Meanwhile, corporate lending is the largest sector and the dominant allocation for private debt portfolios, primarily via direct lending to companies to finance growth and acquisitions, often via a private equity company. LGT Crestone flagged that the level of private equity “dry powder” is at near record highs, with further growth anticipated.
LGT Crestone acknowledged the asset is not without its risk, but the recent commentary has “overstated the risk” to investors. Similarly, defaults are a risk but are mitigated by recovery rates which result in relatively low overall loss rates.
“Defaults often grab the headlines, but the general rhetoric often misses the impact of recovery rates which impact ultimate loss rates on loans and portfolios.”
A more extreme recessionary scenario could see default rates pick up, however, which could mean recovery rates decline and result in larger losses.
At the end of last year, LGT Crestone confirmed the acquisition of CBA’s personal advice business for ultra-high-net-worth and high-net-worth clients. It currently comprises approximately 500 clients and over $5 billion in client assets.
As a part of the deal, LGT Crestone will integrate approximately 40 experienced advisers, associates and support employees into its business – including 19 investment advisers.
AUTHOR
Laura Dew
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